Sears seeks to capitalize itself on the value of its real estate

Acres of parking adjoining the Strongsville Sears that the ailing retailer controls may be the key to finding a buyer for it as well as its North Olmsted store. Both are attached to major regional malls.

Shrewdness, smarts or desperation — or a mixture of all three sentiments — are at work in the plan by Chicago-based Sears Holding Corp. (NASDAQ: SHLD) to offer at auction 16 Sears locations around the nation, including its North Olmsted and Strongsville stores.

Northeast Ohio real estate observers expect the mall anchors to draw significant interest on May 22 when the online auction goes live for the joint venture to market them via the RealInsight auction site and the Cushman & Wakefield brokerage.

Despite the profound woes facing retailers, both sites are regarded as high potential locations because both Starwood Retail-owned malls are in high-demand areas with strong demographics.

According to the auction site, both locations include stores of less than 170,000 square feet on parking lots (under the retailer's control) of about 19 acres. Sears said it may stay in the locations, but Howard Riefs, its spokesman, wrote in an email that the retailer would not speculate beyond says it's interested in leasing the locations back.

Rustom Khouri, CEO of Westlake-based retail and office developer Carnegie Management & Development Corp., said the presence of the large parking field, and with it the ability to remake the Sears buildings, make the offerings exciting.

"There are many retailers of different sizes who are trying to get into North Olmsted and Strongsville," Khouri said in an April 12 phone interview with Crain's. "Those locations have some of the best demographics in the region. The North Olmsted parcel has all kinds of potential. It's at an end cap of the center and has highway visibility as well as visibility and access to Great Northern Boulevard."

If the sites did not include the parking lots, the attraction would not be so great. Khouri said in such a situation the only play would be for an end user with a big space requirement. Bidders, he added, have to find out if the retailer's agreements with the mall would allow access to the property for redevelopment.

Brad Kowit, the principal of Mayfield Heights-based Kowit & Co. real estate brokerage and a serial real estate developer, said the big limiting factor is that the projects are so huge that few developers may have the resources to tackle them.

"People are still building shopping centers in Strongsville," Kowit said, and vacancy is low in North Olmsted, so he is confident there will be strong interest in the properties.

"Good real estate is good real estate, and that's the case here," Kowit said. "But it all depends on the price." Too high a price — or a price driven too high by competing bids — would limit redevelopment options.

The big question will be whether the adjoining mall owner in both cases, Starwood Retail Partners of Chicago, will join the bidding. In an email, the concern hinted it might join the bidding.

Jeff Zeigler, chief operating officer of Starwood Retail, said the company looks at all its former anchor locations for opportunities to add mixed-use components to its properties.

"We've successfully done this in several properties around the country, and will continue to do so as circumstances arise," Zeigler wrote in the email. Starwood already did that at the former Giant Eagle store adjoining the mall. It bought the property from the Pittsburgh-based grocer in 2015 and redeveloped it for multiple tenants.

However, chances are the auctions are going on because adjoining mall owners may have already passed. Or they would not cough up enough cash to suit the retailer.

Indianapolis-based Simon Property Group (NYSE: SPG) announced last Monday, April 9, that it was commencing construction to redevelop Sears stores at five malls around the country in a previously announced joint venture. The sites will become multiple restaurant sites, in at least one case home to a large-format retailer new to one market and even fitness centers.

Closer to home, Columbus-based Washington Prime Group (NYSE: WPG) also announced plans Friday, April 6, to launch a "multi-million dollar" renovation of the former Sears store at its Southern Park mall in Youngstown with retailers that it said it would identify later.

WPG wanted the Sears store gone bad enough, and had leased the site to the department store rather than selling or giving it to the big store like many mall developers, that it negotiated an early end to the lease. Such steps usually are taken to secure better rents than old leases provided.

By launching the offering Sears hopes to capitalize on its real estate on the front side, rather than waiting until the property value is diminished by store closings and leaving the sites to be mined by others. Each Sears in the offering here has a market value of about $6 million for property taxes, according to Cuyahoga County tax records.

Sears also has a good use lined up for what proceeds the sales may produce. Riefs said proceeds from the real estate ventures will go toward meeting the long-established company's pension obligations.